Because of continuing bailouts, by the mid-1980s the Federal Savings and Loan Insurance Corporation (FSLIC) was broke while failures continued. Regulators, attempting to protect their reputations and jobs, hid the problems from the public. Needing a solution without money, they arranged mergers between failed institutions and solvent ones, routinely offering non-cash incentives such as yield guarantees, promises difficult if not impossible to keep.
By the time the dust settled, direct cost to the taxpayers for the bailout was somewhere between $150-$200 billion. Add the cost of insurance premiums, always paid by somebody, and those numbers really move up.
General economic instability and downright mismanagement hit the S&Ls hard. Meanwhile, the commercial banks, operating in the same environment, faced severe challenges of their own.
Deregulating deposit pricing, the return offered for making the deposit, and expanding permissible investment activities for the S&Ls increased the level of competition at commercial banks. Money Market Mutual Funds, paying higher interest rates, siphoned off large volumes of their deposits. At the same time, commercial banks lost many of their major corporate clients, as the market then allowed obtaining short-term financing with commercial paper instead of bank loans.
Other traditional commercial banking products fell under an attack of financial innovation and specialization. Their home mortgage business slowly drifted away and their letters of credit and forward contracts were replaced by exchange-traded derivatives.
This was a long way from earlier and better times. The Federal Deposit Insurance Act of 1950 used a rebate system to cut the assessment rate on insured deposits from 8.7 cents per $100 to 3.7 cents per $100. FDIC insurance reserves were invested in Treasury securities and in 1961, for the first time, investment income exceeded assessment income. Insurance coverage was increased by the 1950 Act from $5k to $10k. (It increased to $15,000 in 1966, to $20,000 in 1969, to $40,000 in 1974 and to $100,000 with the DIDMCA.) The 1950 Act also provided for direct “open-bank assistance” to a failing insured bank whenever, in the opinion of the Board of Directors of the FDIC, its continued operation was essential in maintaining adequate banking services to the community.
This last provision of the 1950 Act likely contributed to another shift in the regulators’ attitude which added to the scope of the problem. The Too Big To Fail (TBTF) Doctrine, based on the premise that the failure of a large institution could, through a domino effect, start banking runs that might bring down the whole monetary system, was implemented twice: First Pennsylvania Bank, with $8 billion in assets, in 1980 and Continental Illinois National Bank, with $45 billion in assets, in 1984.
Total failures of insured deposit institutions hit a peak of 534 in 1989.
Note: Data for S&Ls prior to 1980 not shown.
Meanwhile, Congress did not just sit on its hands. In 1989 it enacted the Financial Institution Reform, Recovery, and Enforcement Act (FIRREA), with many of its provisions pointed at the FDIC. The former Federal Deposit Insurance Fund was renamed the Bank Insurance Fund (BIF). A new Savings Association Insurance Fund (SAIF) replaced the defunct Federal Savings and Loan Insurance Fund under FDIC management. And the FSLIC Resolution Fund of the Resolution Trust Corporation (RTC) created by FIRREA to resolve failed and failing savings associations problems and to manage savings association receiverships, was placed under FDIC management.
With the Federal Deposit Insurance Corporation Improvement Act (FDICIA), enacted in December of 1991, Congress addressed FDIC procedures and practices. The flat rate for deposit insurance, set by statute, became a risk based assessment system with each bank’s assessment reflective of the risks it posed to its insurance fund. Five capital zones, ranging from well-capitalized to critically undercapitalized, were established along with increasingly harsh restrictions and mandatory prompt corrective action by regulators who now had authority to close a failing insured bank.
In situations threatening systemic risk, that To Big To Fail Doctrine, FDICIA requires the FDIC Board, the Board of Governors of the Federal Reserve System, and the Secretary of the Treasury, in consultation with the President, to agree that the closure of the insured institution would have a serious effect on economic conditions or financial stability. To cover insurance losses, FDIC may borrow up to $30 billion from the Treasury, money to be repaid through deposit insurance assessments.
The banking industry struggled through the 1990–91 recession with lingering losses on commercial real estate, loan demand down, and the Bank Insurance Fund insolvent by $7 billion. Thanks to legislative action and taxpayer bailout, the industry recovered, but only at enormous cost.
Following the 1990–91 recession, the U.S. economy began a major expansion. Interest rates plummeted, the average yield on three-month Treasury bills fell and remained near 3% throughout 1993. The number of unprofitable banks decreased from one out of 9 in 1991 to less than one in 20 by 1997. Southwest Bank of Jennings, Louisiana, failed on November 21, the only bank to fail that year.
By developing new products and services (ATMs, derivatives, etc.) less affected by interest rate swings, commercial banks became less reliant on net interest income. Consolidation reduced their numbers by more than 3,000. Bank holding companies, responding to the Riegel-Neal Interstate Banking and Branching Efficiency Act of 1994, combined their bank subsidiaries. The Act also enabled interstate combinations between unaffiliated banks. Some of the nation’s largest banks merged.
Record profits in the banking industry wetted appetites for financial deregulation and the elimination of what many perceived to be obsolete Depression-era laws. The 1933 Glass-Steagall Act (P.L. 48-162, Sections 20 and 32) prohibited banks and securities firms that dealt in ineligible securities from owning or controlling each other. Banks could not own securities firms or underwrite or sell most stocks and bonds. Insurance companies could not own banks or take deposits. Each type of institution had its own regulatory agency jealously guarding its authority.
During the past 20 years, technological advances and innovative managers, using seemingly minor loopholes in the law and technological advances, bypassed long established divisions of authority. Commercial banks increased their securities activities up to the legal limits. Securities companies bought or established new companies, known as non-bank banks, offering credit cards and other banking products. As distinctions between their products blurred, Congress moved toward deregulation of financial services culminating in the Gramm-Leach-Bliley Act of November 1999.
The G-L-B Act repealed the affiliation prohibitions of the Glass-Steagall Act, eliminating restrictions applicable to many banks, securities firms and insurance companies, and amended the Bank Holding Company Act of 1956 to permit cross-ownership and control among bank holding companies.
Qualified Financial Holding Companies (FHCs) may now engage in a broad range of financial activities such as: dealing in securities; dealing in insurance in any state; lending, exchanging, transferring, investing for others or safeguarding money or securities; and acting as a financial or investment advisor. In addition FHCs may engage in related activities including making “merchant banking” investments. This allows an FHC to own a company engaged in activities not otherwise permissible for an FHC.
If nothing else, the G-L-B Act is written in politically correct language with appropriate public safeguards. Its supporters claim that allowing one company to meet all of its customers’ financial needs will save $15 billion a year in fees due to greater competition and efficiency. That may be true, but it could just as easily be false.
The effect of the G-L-B Act is to put a lot of eggs in a few very large baskets. It makes sweeping changes in magnitude but none of these changes are fundamental. They all follow established Congressional policies of improving banking regulations, earlier and better detection of problem banks and more efficient resolution of bank failures. Without a doubt, this is a safer system but humans remain in charge. Bank failures as the result of human error, even catastrophic failures, remain possible.
NESARA takes a different approach, calling for fundamental changes in monetary and banking policy, changes that make bank failures virtually impossible. NESARA reorganizes banks as public service utilities, as fiduciary institutions, giving them responsibility for handling other peoples’ money but never allowing them to put that money at risk.
Under NESARA, banks acquire a market segment, namely the making of secured loans by monetizing their clients’ debts, with such a tremendous competitive edge that no other type of financial institution could compete. As regulated public utilities, commercial banks earn a steady, though not exceptional, profit for their owners at almost no risk. Bank size becomes less important. Small, local banks can effectively serve their communities as well as the larger national banks.
Recognizing commercial banks as public service utilities settles once and for all who actually owns the nation’s supply of currency and who receives the benefits of that ownership — We, the American people.
More information about, and a copy of the bill, are located on this web site.